The new face of developing country debt

Abstract

Developing country debt has been a major preoccupation for development policy makers and practitioners since the debt crisis of 1982. It is a major obstacle to economic and social progress in developing countries. After the resolution of the Asian financial crisis of the late 1990s and the debt relief initiatives for low-income countries of 1997–2006 concerns about developing country debt seem to have receded. However, there are a growing number of problems that warrant concern, including the accumulation of domestic debt, short-term debt and private non-guaranteed debt, and increasing recourse by low-income countries to international capital markets. At the same time developing countries have strengthened their capacity to oversee and analyse their debt portfolios. Nonetheless, significant weaknesses remain in debt management capacity at the national level. Moreover, the activities of ‘vulture funds’ and the lack of a sovereign debt restructuring mechanism reveal major shortcomings in the international institutional architecture that need to be addressed urgently.

Keywords:

• Currency and debt
• poverty and inequality
• global South
• investment flows

Acknowledgements

We are grateful for comments on an earlier draft from Pierre Beaudet, Malvina Pollock, José Maurel, Gerry Teeling and participants in seminars held at the University of Ottawa and Carleton University. However, the views expressed here are those of the authors.

Notes

1. World Bank, International Debt Statistics, 2015, 3.

2. For a full list of acronyms used in this article, see Appendix 2.

3. As of July 2014 there were 33 LICs with a per capita GNI of $1045 or less, of which 32 were IDA-only and 91 were MICs with a per capita GNI in the range of $1046 to $12,745, of which 22 were IDA-only. World Bank, International Debt Statistics, 2015, 164. ‘IDA-only’ applies to countries that are only eligible for concessional funding from the International Development Association, the World Bank’s soft-loan affiliate. We also refer occasionally to ‘emerging markets’, which tend to be a higher-income subset of the developing countries. Different sources tend to define the set of emerging markets differently, as we note subsequently in the text.

4. World Bank, International Debt Statistics, 2015, 21.

5. Reinhart and Rogoff, This Time is Different, 103.

6. World Bank, International Debt Statistics, 2014, 23.

7. See Panizza, Domestic and External Public Debt; and Panizza, Is Domestic Debt the Answer?

8. Culpeper, “Debt and Development in South Asia,” 78.

9. The 26 countries included are Argentina, Brazil, Bulgaria, Chile, China, Colombia, Czech Republic, Dominican Republic, Ecuador, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Panama, Philippines, Poland, Russia, South Africa, Thailand, Turkey, Ukraine, Uruguay and Venezuela.

10. Sienaert, Foreign Investment in Local Currency Bonds, 9.

11. IMF, “Local Currency Bond Markets.”

12. Some of the funds from MDBs are provided as grants. As countries move up the income ladder, the terms become harder, with a mix of concessional and non-concessional terms, and non-concessional terms thereafter.

13. Panizza, Is Domestic Debt the Answer?; and Reinhart and Rogoff, This Time is Different, Chs. 8–9.

14. Reinhart and Rogoff, This Time is Different, 103.

15. World Bank, International Debt Statistics, 2015, 16.

16. Bank for International Settlements, 84th Annual Report, 72. The emerging markets in this context comprise: in Asia – China, India, South Korea, Taiwan, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore and Thailand; in Latin America – Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela; in Central Europe – the Czech Republic, Hungary and Poland; plus Russia, Turkey, Saudi Arabia and South Africa. BIS, 84th Annual Report, 60.

17. World Bank, International Debt Statistics, 2013, 8.

18. World Bank, International Debt Statistics, 2013, 9.

19. World Bank, International Debt Statistics, 2015, 21.

20. See Nellor, “The Rise of Africa’s ‘Frontier’ Markets.”

21. Ibid.

22. Ibid.

23. Willem te Velde, Sovereign Bonds in Sub-Saharan Africa.

24. Ibid., 2.

25. Ibid., Table 1, 3.

26. Ibid., 3.

27. Ibid., 3.

28. Romania had originally provided a $15 million export credit to Zambia to purchase Romanian agricultural machinery. As a result of problems in servicing this debt and the failure to reschedule it, the principal amount due was compounded by arrears and interest charges over the next 20 years. The amount sought by Donegal through litigation ($55 million) also included fees, interest and legal costs.

29. Laryea, “Donegal v. Zambia,” 195.

30. IMF, “Heavily Indebted Poor Countries (HIPC) Initiative,” Table AIII16, 46.

31. World Bank, “World Bank to Increase Support.”

32. UNCTAD, “Argentina’s ‘Vulture Fund’ Crisis.”

33. Li, “Debt Restructuring Mechanism.”

34. UNITAR. “Institutional Framework for Public Sector Borrowing.”

35. The two software systems serve different sets of countries. The CS-DRMS typically serves member states of the Commonwealth, while UNCTAD’s DMFAS serves other countries, although there are some exceptions.

36. IMF, “Heavily Indebted Poor Countries (HIPC) Initiative.”

37. Prasad and Pollock, “Measuring Performance in Public Debt Management,” 10; and World Bank and International Monetary Fund, “Helping Developing Countries Address Public Debt Management Challenges,” 10.

38. Austria, Germany, Netherlands, Norway, Russia and Switzerland.

39. As well as new terms for pari passu clauses.

40. Makoff et al., Sovereign Bond Contract Reform.

41. There is also no mechanism to restructure PNG debt if it becomes a problem.

42. It was pointed out during the discussions that debt restructuring problems now encompass the advanced economies of Europe (with the Greek debt crisis being the most conspicuous) as well as developing countries. A new framework that is truly global in its scope is required.

44. IMF, “Staff Guidance Note.”

⁴³ Kappagoda, “Debt Sustainability Framework,” 4–10.